U.S. stock indexes are hitting all-time highs.  The S&P 500 just closed above the 3,000 mark for the first time ever. The Dow surpassed 27,000 for the first time ever this past week.  The Nasdaq surpassed 8,200.

We need a little reference here.  The Nasdaq peaked in early 2000 just above the 5,000 mark, and this was the top of the tech bubble of the late 1990s/ early 2000.  We are over 3,000 points above the top of the tech bubble nearly 2 decades ago.

Now, let’s compare to the lows in March 2009 after the financial crisis hit.  The S&P 500 hit an intra-day low of 666. (Yes, it really was that number.) We are well over 4 times the amount seen just over a decade ago.  We aren’t that far away from being 5 times that low.

To be sure, the market likely oversold due to the fear of that time.  We have also had a lot of monetary inflation since that time. But when things go up that far and that fast, something significant is going to happen.  10 years may seem like a long time, but it isn’t a long time for an entire stock index to go up over four times what it was.

Also, consider the extreme bear markets in history.  During the Great Depression, the S&P 500 went down about 86% in a three-year period.  If stocks went down by 90% now, then the Dow would go down to about 2,700 and the S&P would go down to about 300.

If you invested in early September 1929, you would have waited until 1954 to get back to even again.

Would You Be Devastated?

Having a crash in stocks is not the end of the world.  The Japanese market peaked in 1989.  30 years later it is just above half of what it was at its peak. I hope there aren’t a lot of buy-and-hold investors still holding on.

Most Americans do not have a significant amount of net worth in stocks.  Most Americans don’t have that significant of a net worth when you take away the equity in their primary residence.

The wealthy own the great share of stocks, but that is mostly the Pareto principle talking.  Middle class America does own some share of the wealth in stocks, but it is largely in retirement plans such as 401k plans. This is important to note.

If we see a massive drop in stocks, I don’t think that by itself is going to dramatically alter the daily lives of most Americans.  The problem will be elsewhere.  If there is a dramatic fall in stocks, this likely means that there will be much higher unemployment.  It also likely means that housing prices will fall significantly. This will be helpful for those wanting to buy a house, but it will hurt those who already own a house with a mortgage and are living on the edge.

For most middle class Americans, employment is the number one thing.  You want that steady income.  Maybe wages will drop.  In a corporate environment, you probably won’t see an actual reduction in your paycheck if you keep your job.  You may not see an annual raise for a couple of years.  You may be given more work, which means your per hour wage may go down if your hours go up.

The good thing about a recession is that prices generally come down.  This was not the case in the 1970s, but we are not in that type of environment right now.

It isn’t called a correction for nothing.  We actually need a significant drop in prices.  The reason middle class America is hurting right now is because life is so expensive.  It would help if tariffs were reduced too, but we especially need a recession to cure this.

Going back to stocks, I think this will be one of the least significant things for most working Americans.  Stocks are more symbolic of the state of the economy.  A crash in stocks will not cause other problems.  It will be in tandem with the other problems.

Really, our problems are already here.  The problems are just not fully exposed.  The misallocation of resources will be more exposed when stocks fall and unemployment goes up.

A drastic fall in stocks may ruin the retirement plans for some people, but these people shouldn’t have so high a percentage of their wealth in stocks if they are anywhere close to retirement.

I think some in the FIRE community (financial independence, retire early) will suffer because there are many who follow the advice to buy U.S. index funds and hold them to get a long-term return in the neighborhood of 8% annually.  Someone who followed this formula in Japan in 1989 is still waiting for that 8% return.  Actually, they are still waiting for a zero percent return.

Life in Japan has gone on for the last 3 decades.  Life will go on in the U.S. too, even if stocks fall by 80%.  It isn’t the end of the world for most people.

You shouldn’t bet on a decline of 80% in stocks.  Instead, just ask yourself if you are prepared if such an event were to happen. You wouldn’t be happy about it, but would life go on as usual?  Would it significantly impact your retirement plans?

If thinking about a decline in stocks of 80% causes you significant anxiety, then do something about it.  The time is now to rebalance your portfolio and to lighten your percentage in stocks.